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RO2 Investment Principles And Risk > The Macroeconomic Environment And It's Impact On Asset Classes > Flashcards

The Macroeconomic Environment And It's Impact On Asset Classes Flashcards

1
Q

How m8ght the government affect the macroeconomic environment?

A

Interest rates
Political Bias
Quantities Easing

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2
Q

How long is the effect of a change in interest rate felt?

A

18-24 months after the change

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3
Q

What is the greater fools theory?

A

Expe ting someone to buy a stock after you. Pushes the price up but eventually pops.

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4
Q

How often has there been a boom in the market?

A

Every decade, for the last 60 years, with every bull market lasting about 10 years.

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5
Q

What is an interest rate driven cycle?

A

When the central banks lower interest rates to stimulate the market as it goes into a bare market.

This causes investors to direct money into specific sectors, starting bubbles and restarting the cycle.

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6
Q

How much money did the government pump in due to BREXIT?

A

£895bn

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7
Q

What does globalisation have a great negative effect on?

A

Low skilled labour intensive industries due to companies looking for cheaper alternatives abroad.

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8
Q

What is the business cycle often referred to as?

A

The boom bust cylcle

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9
Q

Who tried to stop or soften the business cycle

A

Gorden Brown as chancellor

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10
Q

What are the stages of the business cycle?

A

Expansion
Boom
Slowdown/contraction
Recession
Recovery

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11
Q

What happens in the expansion phase?

A

Demand for goods and services
Growth of sales and profits
Demand overtakes supply
Inflation rises
The economy starts to overheat
Interest rates risen

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12
Q

What happens in the boom phase

A

Highest point of the cycle
The economy grows at its fastest
Interest rates further increased (less money in pockets)
Demand falls

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13
Q

What happens in the contraction/Slowdown phase?

A

Inflation stays high before starting to reduce.
Demand falls
Business sales/profits fall
Unemployment rises businesses bust
Inflation falls
Interest rates decreased to encourage spending

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14
Q

What happens in the recession

A

Severe economic downturn
Weak profits
Low spending
Inflation falls
Interest rates fall further to encourage cheaper borrowing
Severe enough is known as a depression

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15
Q

What happens in the recovery phase?

A

Restart of expansion
Inflation interest low
Confidence grows
People spend more
Demand rises
Production and profits rise

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16
Q

What is considered a contraction?

A

When GDP falls for one quarter compared to the previous quarter

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17
Q

What is considered a resession

A

When GDP falls for 2 consecutive quarters

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18
Q

What is considered an expansion

A

GDP rises for one quarter

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19
Q

What is considered a boom?

A

When GDP is at its highest before falling

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20
Q

What measurement tells us what the government is spending?

A

Goverment Capital Expenditure

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21
Q

What does the PSNCR tell us?

A

How much money is needed to be borrowed for the government to opperate

Ie the difference between money raised in taxes minus to government capital expenditure

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22
Q

What happens to PSNCR in a recession

A

It will grow as tax receipts fall and government spending to address unemployment rises.

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23
Q

What happens to PSNCR in an expansion?

A

It falls as tax receipts rise and government expenditure falls

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24
Q

What happens to fixed interest investments due to the economic cycle?

A

Less attractive in a strong economy due to rising interest.

More attractive in a weak economy due to lowering interest rates

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25
Q

What happens to equities due to the business cycle.

A

Prices rise as confidence in stocks goes up until peak.
As interest rises, it becomes increasingly harder to make a profit even with high growth.

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26
Q

What happens to unlisted securities due to business cycles?

A

Experience more rapid growth with more risk

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27
Q

What is the most attractive asset in a recession?

A

Fixed interest investments due to comparison to low rates and low inflation.

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28
Q

What asset is least attractive in a recession?

A

Equities due to the likelihood of businesses failing.

29
Q

How can fiscal policy be used to affect the macroeconomic environment?

A

Spending more taxing less in down turns to put money in people’s pockets.

Cutting spending/taxing more to take money during upturns

Affects people’s investment decisions and business decisions around business decisions. (Via equity or taking on debt)

Affects budget defecits.

30
Q

Why is spending better than cutting taxes?

A

Spending guarantees that the money enters the economy. Tax cutting could end up with people saving.

31
Q

Who does keeping interest rates low affect badly?

A

The retired who rely on savings will be eroded by inflation.

32
Q

How are exchange rates handled in the developing world?

A

They are floating - left up to supply and demand

33
Q

Why are exchange rates usually fixed in the developed world?

A

To give better control and stability

34
Q

When was the last time the UK had fixed exchange rates?

A

When it left the European Exchange Rate Mechanism (ERM) in the 1990s

35
Q

What does the base interest rate signify?

A

The short-term debt issued by the Central Bank. Which companies then use to set their own rates off.

36
Q

What does SONIA indicate?

A

The rate at which banks lend to each other

37
Q

What can be used to indicate where we are in the business cycle?

A

The base interest rate
SONIA

38
Q

What must the BOE do if they miss the inflation target rate?

A

Write a letter to the Chancellor about why and what they will do about it.

39
Q

How does the BOE ease monetary policy?

A

BOE Reduces shorter term interest rates
Longer-term rates lower if markets agree with their inflation expectations.
Asset prices rise
People and businesses borrow money, then spend and invest it.

40
Q

How do the BOE tighten monetary policy?

A

BOE Raises shorter term interest rates
Longer-term rates rise.
Asset prices lower
People sell

41
Q

What is the BOE primary method of monetary control?

A

The Gilt Repo market

42
Q

What is M0

A

Narrow money
Notes, coins in circulation, and bank operational money held with the BOE
Indicator of consumer spending and retail sales

43
Q

What is M4

A

Broad money
All deposits created by lending from banks and building societies
All money held in banks by savers
Notes and coins in circulation

44
Q

What does growth in M0 suggest?

A

Strong consumer spending

45
Q

What does contraction in M0 suggest?

A

Lack of confidence in consumers as they put their money in the bank rather than spend it.

46
Q

What does growth in M4 suggest?

A

More lending is taking place

47
Q

What would contraction in M4 suggest?

A

Lenders are reluctant to lend

48
Q

How is money in the system reduced

A

By selling bonds

49
Q

What measures of inflation are there?

A

CPI- used as compares with European markets
RPI- legacy, still used for index linked gilts
CPIH- includes owner occupier housing costs and council tax (OOH)

50
Q

What is disinflation?

A

When inflation slows

51
Q

What is stagflation?

A

When an economy experiences flat growth and inflation at the same time

52
Q

What does high inflation do to fixed interest investments?

A

They lose value as the return from interest is worse.

Expectations of high inflation also lead to demand for high running yields. This requires paying less for the bond due to fixed coupon.

53
Q

What is a good hedge against inflation?

A

Equities as good companies will usually make more money to compensate against inflation.

54
Q

What did the government put in to help people who saved in cash because of the affects of low interest rates?

A

£5000 tax-free savings rate for interest and £1000 personal savings allowance for basic tax, £500 for higher rateaditional get no PSA

55
Q

What effect do low interest rates have on equity?

A

Allows companies to borrow cheaply and increase profits

The same happens for property.

56
Q

What would high interest rates do to exchange rates?

A

Put demand for deposits up in that country

57
Q

What would demand for overseas products do to exchange rates?

A

Weaken the domestic currency against others.

58
Q

Who is a fall in the value of sterling good for?

A

UK companies want to trade abroad as holding foreign currency means they can buy more in the UK with it.

59
Q

How is the real exchange rate worked out?

A

By taking into account the inflation rate in both countries.

60
Q

What happens if the real exchange rate rises?

A

Goods in relation to the same foreign goods become more expensive and demand drops as imports are cheaper.

61
Q

What does the balance of payments compare?

A

The volume of a country’s goods and services being sold abroad with the volume of being bought by the country.

Surplus =money in
Deficit = money out

62
Q

What does the current account measure?

A

Trade in goods, services, investment incomes, and overseas aid.

It is made up of visible trade and invisible trade.

63
Q

What is visible trade

A

Physical goods, raw materials, etc.

64
Q

What is invisible trade?

A

Tourism, financial services etc.

65
Q

What does a surplus in the current account mean?

A

The country is building up funds within the economy, which it can spend as an indicator of strength.

Means there is a need for foreign countries to buy your currency to buy goods within the country. Increasing demand and strength.

66
Q

What does Deficit in the current account mean

A

The need to sell your currency in order to purchase foreign currency and buy goods from abroad. Demand decreasing

67
Q

What does the capital account measure?

A

Capital, financial flows, and investments.

Investments in and out of the country.

Surplus = investments in
Deficit = investment out

68
Q

If there are deficits in the current account, what must be done?

A

Must be made up from the capital account.

BoE can use stores of foreign currencies if deficit remains

69
Q

What has the UK balance generally sat at?

A

In deficet - more imports

RO2 Investment Principles And Risk (18 decks)

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